City Journal

Dick Netzer

Reinventing the Port Authority

A relic of the days when bigger was better, the Port Authority should now do what it does bestand dump the rest.

Summer 1996

In 1995 the newly appointed executive director of the Port Authority of New York and New Jersey, George Marlin, announced that he would strip the Authority to its core transportation functions” and would even outsource and privatize some of those. He soon translated the announcement into action, selling the Vista Hotel and beginning to arrange for the sale of the World Trade Center. Shortly afterward New York City Planning Commission chairman Joseph B. Rose went further, asking whether New York City needed a Port Authority at all. Though Rose made the rather parochial claim that the Port Authority subsidizes New Jersey at the expense of New Yorkers, his point is worth considering seriously. Whatever the argument for the Port Authority might have been years ago, it is not so obvious today. When asked to make that case, even Marlin, instead of mounting an all-out defense of the agency, temperately maintained, I have to deal with the hand that Ive been dealt.”

Ours is an age of privatizing functions once seen as necessarily governmental; of devolving responsibility from large, centralized organizations to small, responsive, decentralized ones; and of encouraging competition rather than consolidation among the providers of services. The Port Authoritys structure is the product of an earlier age of faith in big organizations, public and private. Though on paper it is an independent body serving the two states that appoint its commissioners, in fact it is tightly controlled by the two governors, each of whom must approve its boards every action, right down to the minutes of each meeting. Little wonder that such a throwback has repeatedly shown that it can blunder spectacularly. And despite Marlins promising first steps, the Authoritys willingness to embrace radical change remains in doubt. Its recent $3 billion plan for improvements at Kennedy Airport, for example, splits the difference between the agency's bureaucratic past and the thorough privatization that would be its best strategy for the next century. Surely critics are right to question the Authoritys future.

Created in 1921 by an interstate compact approved by Congress, the agency exists mainly to develop bridges and tunnels linking the two sides of the Hudson, along with transportation infrastructure, like air and marine terminals, to serve the wider region. Over the years it has invested nearly $10 billion in such facilities, whose replacement value today surely exceeds $50 billion.

The Port Authority has financed these facilities almost entirely with revenues collected from their users, but it has given this method of finance a new and ultimately destructive twist: the massive cross-subsidization of one facility by another. Fortunately, this was not always the Authoritys practice. At first it paid the debt on its bonds with money drawn exclusively from the specific project being funded. This strictness began to change after World War II. Having completed several bridges and tunnels by then and flush with toll money, the Authority began issuing consolidated bonds” to finance new investment. Any user fees could go toward the debt service on these bonds, allowing the Authority to take on projects that might not pay for themselves for some years, if ever.

Arguably, it makes sense to use consolidated financing for separate projects that are components of a single system. A reconstruction of one of the three regional airports, for example, could divert much of its traffic for a year or two, shrinking its income below what it needed to finance the construction bonds. As a temporary measure, cross-subsidy would be a sound policy. The danger, of course, is that such a subsidy will become permanent, providing a lifeline to a project incapable of supporting itself. This is precisely what the Port Authority has done time and againand it has been its downfall.

Currently the Authority breaks down its more than $2 billion annual budget into five different areas of activity: interstate transportation (its four bridges, two tunnels, bus terminals, and PATH), air terminals (the three main airports, the smaller one at Teterboro, and two Manhattan heliports), marine shipping terminals (in New Jersey, Staten Island, Brooklyn, and Manhattan), world trade (the World Trade Center), and regional development (the surviving projects of the Authority's unhappy attempt to turn itself into the region's main economic development agency).

The table on page 87 shows that most of the Authority's projects either lose money today or are defunct. The current moneymakerswhich carry the losersare the bridges and tunnels, profitable from the start (except during World War II gas rationing); the airports, in the black for 25 years; and the World Trade Center, profitable since it became fully occupied shortly after its completion.

By contrast, most of the Authoritys other activities have long operated in the red. Chronic losses were expected with PATH (although not of the current magnitude) and, to a lesser extent, with the 41st Street bus terminal. But the opportunitywhether planned or notto run a facility at a deficit for an indefinite term hardly concentrates a manager's mind. It removes the market incentives disciplining an agency that must cover its costs from its own revenues: facing a deficit, such an agency must cut operating costs or offer services attractive enough to induce users to pay higher prices. In planning a new project, it must convince potential bond buyers that there is a real demand for the project, that real people will pay enough to use it so that it can cover its costs and pay its debts. The Port Authority does not have to do any of this: it has to convince investors only that there will be a surplus for all of its enterprises taken together. So nothing stops it from launching sure losers.

At its creation, the Port Authority had only one explicit assignment: to improve the movement of rail freight cars across the harbor. Despite plenty of cross-harbor traffic at the time on barges (called lighters”) operated mainly by the railroads, demand was still strong for a tunnel. The onset of the Great Depression ended consideration of this venture, but even in the l920s it was not clear that the region needed a rail tunnel. It was obvious that trucks were soon to dominate short-distance freight hauling, and the Port Authority was already busy building trans-Hudson crossings to extend their range.

Construction of the Holland Tunnel started about the time the Port Authority was born, and New York and New Jersey quickly assigned the completion of that project to the new agency. By the end of the 1920s, the Authority had also been directed to build the George Washington Bridge and the three bridges between Staten Island and New Jersey. In the thirties the agency would take on construction of the Lincoln Tunnel, its last interstate crossing. By 1950 the Authoritys vastly expanded transportation empire included rail, marine, truck, and bus terminals, as well as Newark and La Guardia airports.

There was nothing strange about the Port Authoritys venturing into this territory in those years. State and local government agencies elsewhere in the country were in the same business, sometimes because private operators had backed away, sometimes at the request of carriers that could not themselves agree on financing, andin the case of airportsbecause a 1946 federal law provided government grants only to those that were publicly owned.

By the late 1950s the Port Authority had earned a reputation for extraordinary effectiveness. Though its policy judgments were far from impeccable in this era, its day-to-day operations and planning were admirably professional. Even its most complex projects, like the building of bridges, tended to come in under budget and on time, as uncommon an occurrence for large public works then as now. Austin Tobin, the Authority's chief executive from 1942 to 1971, won plaudits as perhaps the most gifted and certainly the most entrepreneurial of the nation's public-sector managers.

Even in its glory days, though, the Port Authority had a penchant for misjudging trends and making egregious blunders. As with the vast schemes of Robert Moses, the adulation of the press caused these missteps to go largely unremarked, something bound to generate hubris in an agency no less than in an individual.

Mistakes abounded. The Columbia Street Grain Terminal, built in 1944, quickly became obsolete with the opening of the Saint Lawrence Seaway, a project whose implications for grain export through New York had long been evident. The Authority's Manhattan and Newark truck terminals, completed in 1949 and 1950 as cargo depots, were instant flops, unable to compete with more convenient rivals on the city's outskirts. And the marine terminals program fared only slightly better, succeeding with facilities in Newark and Elizabeth but at the same time investing heavily elsewhere in old-fashioned, inefficient finger piers and in docks for the fast-ebbing passenger-ship industry.

These blunders pale, however, next to those that afflicted the airports. La Guardia badly needed repair and improvement in 1947, but the Port Authority temporized. It so botched its first reconstruction of the terminal that it had to do another one shortly thereafter. It lagged in runway improvements, shoring up sagging tarmac only when floods and accidents forced the issue. And for years it stubbornly refused to build a multi-story garage, long after such structures were standard features at all major American airports and had proved a cost-effective way to accommodate travelers clamoring for more parking.

The Authoritys decisions at JFK were even worse. While other major airports built at the same time featured a single large passenger terminal or several that were interconnected, JFK allowed individual airlines to erect widely separated terminals of their own design. You can still see the results today: impossible treks from one airline to another, traffic tangles in the airport's repeatedly rebuilt interior roads, and the preference of international travelers to bypass JFK altogether. Such difficulties contributed, no doubt, to the sorry performance of both Pan Am and TWA, the two major international carriers that were long based in New York and whose decline cost the city over 10,000 jobs.

The Port Authority aggravated these deficiencies by refusing to consider the installation of any kind of people-moving system, like those built in the 1970s and 1980s at Dallas-Fort Worth, Atlanta, and Seattle-Tacoma. The agency apparently viewed an internal rail system as the first step on a slippery slope toward having to take some responsibilityheaven forfend!for access to JFK. Unlike airport operators elsewhere, the Authority has long resisted cooperating with plans for improving transportation to and from its airports. (See box, page 80.)

In 1961 New York and New Jersey made a series of decisions that would forever change the way the Port Authority did business. With commuter railroads on both sides of the Hudson languishing, the federal government had decided in 1958 to allow the big rail operators to abandon their money-losing passenger service if it threatened their survival as freight carriers, raising the specter that such service, especially in New Jersey, would soon end. Alas, the Port Authority was at hand, a moneymaking public agency responsible for cross-Hudson transportation: why not direct it to help finance the endangered commuter rail?

Austin Tobin vigorously objected, rightly foreseeing a bottomless pit of subsidies, but the governors overruled him. In 1961 they agreed to a two-part strategy, with something in it for both states. For New Jersey commuters, the Port Authority would take over the bankrupt Hudson & Manhattan Railroad, a decrepit subway system whose lines ran from Newark and Jersey City to lower Manhattan and 33rd Street. It was understood at the time that the system, renamed PATH (Port Authority Trans-Hudson), would operate at a deficit forever, even after heavy investment to rebuild it.

New Yorks reward was the construction of the World Trade Center on top of the lower Manhattan PATH terminal, replacing an old office building owned by the Hudson & Manhattan. Plans were already in the works for the Trade Center, but financing was uncertain. With the Port Authority behind the project, its future was assured. For the agency itself, the deal was a damage-limiting strategy. It had saddled itself with PATH's deficits, but it expected that profits from the Trade Center would eventually offset them.

Innocent as these tradeoffs might sound, the deal transformed the Port Authority. First and most ominously, it allowed the Authority to jettison the principle that new projects had to be able to pay for themselves at some future point: permanent subsidization was born. Second, the construction of the World Trade Center injected the agency into the unfamiliar realm of economic development. In the years ahead (but especially from 1977 to 1985, under executive director Peter Goldmark), the Port Authority would become massively entangled in real estate, with projects spread across the entire region: office space in Jersey City and Newark; industrial parks in Elizabeth, the Bronx, and Yonkers; a multi-purpose development in Long Island City; a fishport” on the Brooklyn waterfront. With a handful of exceptionsa resource recovery plant in Essex County and Teleport on Staten Islandthese ventures have been costly failures, providing further evidence (should it be necessary at this late date) of the wrongheadedness of government-directed development.

What should happen to the Port Authority now? Which of George Marlins core transportation functions” really require a public agency, and which ones could private firms handle better? Of those functions that should remain public, which need to be the responsibility of an over-arching, multi-purpose regional agency rather than of more ordinary units of government? This is a somewhat loaded way to pose these questions, of course, but it is the right way, because the critical issue is to end the great mischief done by cross-subsidization. If the Port Authority merely drops its economic development activities, it will still be able to make bad decisions about transportation projects, decisions that neither the market nor the electorate can correct. The rules must be changed to stop cross-subsidization, and the only real way to do this is to separate the Authoritys various activities.

The single most important step in this direction would be to divest the Port Authority of the airports. This would not mean creating a new agency in its stead. Rather, the airports can and should be privatized. Every major airport, in New York or elsewhere, is subject to competitionfrom other airports in its region and from more distant ones trying to be hubs for domestic or international travel. Such competition is likely to increase over time, especially for the New York airports, which must also vie with faster Amtrak service in the crucial Northeast Corridor. Whatever virtues governments may have, the ability to respond swiftly and effectively to market forces is not one of them.

By now we have had much promising experience with airport privatization, especially in Britain, where all the major airports are now in private hands. Londons Heathrow was once a wretchedly uncomfortable and slovenly place, with civil-servant managers who insisted that it was physically impossible to accommodate on any single runway more than about half the number of landings and takeoffs per hour regularly handled at the larger North American airports. Now it is a far more hospitable placealmost a pleasurable transfer point for international travelersand its managers squeeze in more flights and generate far more money, in part from aggressively exploiting retail space in the terminal.

The British firm responsible for this turnaround now operates the airports in Indianapolis and Pittsburgh under contract (outright private ownership would mean the loss of federal funds for improvements). Under this arrangementa promising model for New Yorks airportsthe cities give private managers extensive responsibility and control for the term of the contract and then re-evaluate them at the time of renewal.

In New York, operation of each of the three airports should be contracted out to a different firm, with the idea of encouraging competition in service and user charges. Who can doubt that a private operator at JFK, contending with another private operator at Newark, would have tried long ago to overcome the airport's disastrous design? Likewise, each operator would long since have made major efforts to improve airport access. It is unimaginable that La Guardia would still not have a down escalator from its most heavily used arrival ramp to the baggage-claim areaa situation unheard of at other major American airports.

The Port Authority has taken an important step toward airport privatization in the $3 billion plan for improvements at JFK announced in Maybut it is only a step. The largest component of the plan will turn over to a private firm the reconstruction and operation of the enormous International Arrivals Building. The firm will pay a set rent to the Authority but will otherwise run the terminal without interference. This will probably mean, among other things, vastly superior retail offerings at JFK, whose shops now are a very sorry lot. In every other respect, however, the plan is just business as usual: the agency will manage construction of a new control tower, extensive road improvements, and repair of two terminals, much as it might have in the 1950s.

The marine terminals should be fully privatized, or at least privately managed. Here, too, the whole point is competition, forcing ports and parts of ports to push one another to higher levels of efficiency and innovation. After a long period of decline, the port of New York is still losing market share to its U.S. rivals. In part, this decline is a result of broad changes in the American economy: the decline of manufacturing in the Northeast and Midwest relative to the South and West, the shift of population to the Sunbelt, and the faster growth in foreign trade with Asia than with Europe.

But one can also point to changes in technology and in costs on the docks. Todays bigger ships give an edge to ports that are naturally deeper (or can be dredged more cheaply) and that are well-equipped with alongside wharves rather than finger piers. The loading and unloading of containers requires plenty of space at the water's edgethe more, the better. The revival of American railroads as low-cost freight carriers has put a premium on the quality of rail connections to dockside. Finally, high-cost collective-bargaining contracts, pilferage, and other crime on the docks affect the choice of port. In all these respects, the port of New York is at a disadvantage compared to most of its major competitors in the South and West.

Though a competent day-to-day manager of the marine terminals under its jurisdiction, the Port Authority has been a poor strategist in the face of these changing circumstances. Privatization would change this. The private operators of the separate terminals would have strong incentives to hang tough on labor costs and crime. If the major terminals at Newark and Elizabeth can handle all the port business efficiently (and in competition with each other), no private operator will pour money into the lightly used losers elsewhere in the harborin Brooklyn, for examplewhose survival until now has depended on little more than political pressure. Nor will any private operator be held back from investing in successful terminals by anxiety over its possibly adverse effect on lesser onesa common problem under the Port Authority. Finally, privatization of the ports would allow them to specialize, to develop particular market niches. Like other government agencies currently in the port business, the Authority cant afford the political fallout from trying to be selective about the sorts of cargo that it handles.

Most other Authority operations are monopolies of a sort, making simple privatization more difficult. PATH is one of a kind and competes directly only with the heavily subsidized NJ Transit system, a rival that no private operator could challenge. And while running the bridges and tunnels could be contracted out, competition among the crossings does not make sense. It would generate even more congestion on the big commuter roads as traffic shifted in response to price changes.

If these monopoly enterprises remain public, however, the Port Authority is not the right agency to run them. PATH should become part of the NJ Transit system, which it complements. If New Jersey wants to continue its massive subsidies, that should be its business. The fact that PATH operates across the Hudson should not be a bar to this reform, since NJ Transit already does so.

The Port Authority should continue to operate the bridges, tunnels, and bus terminals, but under new financial arrangements. Profits from the crossings should be committed to paying off the debt on the Authoritys abandoned money-losers, and whatever funds are left after that should simply revert to the New York and New Jersey treasuries.

A streamlined Port Authority could continue to be the focal point for regional transportation planning. Agencies of similar breadth were killed off over the years at the instance of governors and state bureaucrats, and the Port Authority (until recently) has done such work well, contributing to the resolution of many region-wide problems. It also has been an effective lobbyist and marketer on such critical matters as harbor dredging. If the Port Authority were to continue to operate the bridges and tunnels, it could readily finance these low-cost activities, which are not intended to be self-supporting and thus would not suffer the dire effects of cross-subsidization.

A final reason for drastically shrinking the role of the Port Authority is its almost monarchical governance. To a large extent, the blunders of the past 20 years can be blamed on veto-wielding governors, who have exercised virtually unchecked power over the Authority. Some nostalgic observers credit the achievements of the glory days to strong, clear-sighted governors like Al Smith and Thomas E. Dewey. But we can't escape the reality that while some elected leaders will shine, many more will be duds. This chastening truth should make us reluctant to entrust them with services that can easily be privatized or handed over to lower, more focused levels of government.

Imagine what such a new era could bring. Private marine-terminal operators, competing with one another and with other ports, would instantly scrap facilities that are not economically viable and build new ones that incorporated the latest cost-saving technologywithout waiting ages for multiple approvals and deals between governors. When the channels to their docks silted up, they would find a way to dredge them and to get rid of the waste, rather than engage in endless political fights and blame-avoidance while the problem grew worse. Area ports might once again be a hub of world trade, as they were not so long ago.

JFK and La Guardia airports would finally see dramatic action to correct their many ills. Poor decisions would be reversed much more quickly, because managers would face the threat of going bust in the morning rather than the soothing prospect of generous cross-subsidies. Nor could they continue to ignore the problem of access. Market-conscious managers would do everything in their power to see that travelers could reach the airports easily and inexpensively, and they would have every incentive to bring about such improvements in a timely, cost-effective way. For businesspeople and tourists alike, visiting New York would become much less of an ordeal.

The World Trade Center would become what it was originally meant to bean ordinary (if large and distinctive) office development serving as the anchor for lower-Manhattan commerce. Disposing of its profits (or covering its losses) would be the business of its new owners, not of the governors of New York and New Jersey. Other bits and pieces of the Authoritys far-flung holdings would also become the concern of new owners and would sink or swim on their own. Those that private investors refuse to take over would just be paid off in timesomething that a leaner Authority could easily afford.

Should all this come about, the Port Authority could finally return to the one job it has done well from the outset: managing the lucrative interstate bridges and tunnels. This is no small task, as the city has learned to its sorrow with the decaying crossings on the East River. Bridges and tunnels need almost constant rebuildingbut at least this the Port Authority certainly knows how to do.